Packaged food

Now, 56 varieties

Under new ownership, Heinz will both slim down and bulk up

OTHER ketchups just gush out of the bottle but thick, rich Heinz takes its time, claimed a 1970s television commercial. A similar air of expectation surrounded the news that Warren Buffett, an American investor, and Brazil’s richest man, Jorge Paulo Lemann, would take over the ketchup maker for $28 billion. Heinz’s boss, William Johnson, called it the “largest acquisition of any company in the history of the food business”.

Mr Buffett has a fondness for strong brands, which Heinz possesses, and will make easy money from $8 billion of preferred stock he plans to buy. Mr Lemann’s private-equity firm, 3G Capital, will run the show. The duo is offering a high price: nearly 14 times this fiscal year’s expected earnings before interest, taxes and depreciation. But 3G reportedly does not plan to “strip and flip” Heinz for a quick return.

As a private company answerable to two shareholders rather than thousands, Heinz may be better placed than it was to deal with the big forces at work in packaged foods: near-stagnation in developed markets and explosive growth in emerging ones. Investors think the Heinz deal will be a harbinger of consolidation; shares in other American packaged-food makers jumped after the deal was announced. Heinz is a potential buyer and seller of American brands. But the bigger opportunities may lie in newer markets.

Americans still slather ketchup on hamburgers but their habits are changing. Shoppers are shunning packaged foods stacked in the centre of the supermarket in favour of fresher provisions ranged along the periphery. Chilled soup is displacing tinned soup. Fresh pasta is selling fast while demand for the dry stuff is flat. At the same time, supermarkets are pruning the assortment of goods on shelves and consumers are shifting from name brands to supermarkets’ own-label nosh.

Factories producing packaged food are operating well below capacity, notes Thilo Wrede of Jefferies, a stockbroker. Manufacturers are trying to adapt. Campbell, a maker of tinned soup, recently bought Bolthouse Farms, producer of edge-of-the-store foods like baby carrots and salad dressing. ConAgra Foods, the company behind Reddi-wip, sweetened cream you blast out of a can, picked up Ralcorp, which makes retailers’ own-label foods.

The takeover of Heinz, 3G’s first foray into packaged food, is “the first building block” in a plan involving further acquisitions and disposals, believes Mr Wrede. The struggling frozen-foods business may be put up for sale. Heinz makes too many products in too many sizes, suggests Michael Sansolo, a consultant. Its new owners—practised cost-cutters—may insist on culling some of those 57 varieties.

Hunkering down at home is unlikely to be the limit of Heinz’s ambitions. Starting with Brazil’s second-biggest beer maker, Mr Lemann helped create the world’s biggest, most efficient brewer, AB InBev, through mergers and acquisitions with Belgium’s Interbrew and America’s Anheuser-Busch. Heinz is already global. It owns Foodstar, a Chinese soy-sauce maker, and Quero, a Brazilian ketchup company. Under new ownership it will start on its long-standing plan to become a big producer of baby food, reckons Ildiko Szalai of Euromonitor International, a research firm. The Swiss food giant Nestlé could sell baby-food businesses in Mexico, Thailand and elsewhere to satisfy competition authorities. Heinz is a likely buyer.

Heinz is a long way from being the AB InBev of food (it ranks 13th globally). But with Brazilians at the helm and Mr Buffett in the background it is likely to move up.